Executive SummaryThis report provides an introduction to the fair value of accounting measurementsand analysis about its application and impacts on credit market. By answering thethree questions listed, the relationship between financial crisis was analysed, marketvalue of financial institution and its valuation technique was introduced. Based onthe analysis, the report concludes with the opinion that fair value is not involved incausing financial crisis and instead of abandoning the concept, it should be optimizedand applied to the valuation of financial or non-financial asset and liability. A fairvalue measurement is the point to ensure that it is the most representative of thefair value in the circumstances.

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IntroductionThis report is to discuss the case “Former FDIC Chief: Fair Value caused the crisis” byDavid M Katz from the perspective of Fair Value Accounting measurement. This casestudy illustrates that the implementation of fair value method caused the recentfinancial crisis from 2007-2009. William Isaac, the former FDIC (Former FederalDeposit Insurance Chief) chairman and the current chairman of a banking consultingfirm, argued that significant amount of capital had been destroyed by the fair valueaccounting system and it subsequently resulted in the loss of bank lending capacityof $5 trillion. Isaac, further asserted that the situation was even worsened byAccounting Standards setters and regulators that forced banks to mark their illiquidassets.Several theoretical and empirical researches have been done previously related tofair values, on which many arguments about whether it is should be blamed forresulting in financial crisis. Giorgiana et al. (2010) analysed those researches andrevealed that majority of researches were in favour of fair value. The reason offinancial crisis is considered to be the negligence in the process of underwriting andmortgage credit instead of fair value accounting measurement. The study of Ryan(2008) also clarified that the fair value not only didn't but also will not result infinancial crisis. The aim of this report is to analayse the impact of Fair Value Accounting on the creditmarket and whether it caused the global crisis. In detail, the discussions of the caseincludes answering three questions and providing a few recommendations. First,discussing our opinion of the argument that a number of obsevers suggest that fairvaluing of CDOs under the old defintion caused the global financial crisis of 2008.

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